ECB Said the Terra Crash Shows the Risk that Stablecoins Pose to Financial Stability

Written by C, Fiona

Last updated: 2022-07-12

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Stablecoins, according to a new ECB analysis, are not suitable for use in the actual economy as a means of payment or in their current form.

According to a new analysis from the European Central Bank, the cryptocurrency market has grown exponentially over the last decade, posing both opportunities and threats to the existing financial system.

According to the analysis, stablecoins play a pivotal role in today’s digital currency landscape. It is becoming increasingly common to employ stablecoins as a means of interconnecting various blockchain networks and providing liquidity to the DeFi ecosystem.

As a result of a lack of regulatory monitoring, the recent demise of algorithmic stablecoins ecosystems like Terra (LUNA), now Terra Classic (LUNC), highlights the potential contagious impact that these stablecoins could have on the financial system, according to a new analysis. In a portion of the report, it stated:

“A run-on or failure of one of the main stablecoins might have wide-ranging ramifications for crypto-asset markets,” according to the author.

ECB Officials Rejected the Use of Stablecoins

Tether (USDT), a centralized stablecoin, lost its peg after the crypto market fall in May and experienced a 10% outflow of funds.

European Central Bank officials rejected the use of stablecoins as a payment method, saying that the speed and cost of transactions, as well as its redemption terms and conditions, were “inadequate for use un real-world payments,” according to a statement.

The European Central Bank (ECB) has advised that stablecoins not represent a danger to financial stability in Europe.an countries by recommending suitable supervisory and regulatory measures. Stablecoin penetration in the region, however, has been constrained by the lack of activity in stablecoin exchanges by European payment service providers.

Markets in Crypto Assets (MiCa) framework was recently approved by the European Union, which provides instructions for crypto asset service providers (CASPs) to operate in Europe.. Unbacked crypto assets, stablecoins, trading platforms, and crypto-wallets will all be covered by the preliminary accord.

3/13 Large stablecoins will be subject to strict operational and prudential rules, with restrictions if they are used widely as a means of payment, and a cap of 200€millions in transactions/day.

— Ernest Urtasun (@ernesturtasun) June 30, 2022

For fear of another Terra-style event, the European Central Bank is limiting the amount of stablecoins it issues to electronic money and credit institutions.